Abstract
The relationship between stock prices and the trade balance can be either negative or positive, depending on the signs of the wealth effect channel and the exchange rate channel. While previous studies examined this relationship in a time-invariant framework, we employ a time-varying approach so as to examine the dynamic correlations of trade balance and stock prices in the United States over the period 1792–2013. The results of our empirical analysis, which remain robust to alternative specifications, reveal that correlations between the trade balance and stock prices in the United States are indeed not constant, but evolve heterogeneously overtime. In particular, the correlations are, in general, significantly positive between 1800 and 1870, while significantly negative thereafter. The policy implications of these findings are then discussed.
This is a preview of subscription content, log in via an institution to check access.
Notes
In 2016, US exports were $2.2 trillion and imports were $2.7 trillion, with the trade deficit being about $500 billion.
The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy; The cost and availability of raw materials, intermediate goods and other inputs; Exchange rate movements; Multilateral, bilateral and unilateral taxes or restrictions on trade; Non-tariff barriers such as environmental, health or safety standards; The availability of adequate foreign exchange with which to pay for imports; and Prices of goods manufactured at home (influenced by the responsiveness of supply)
Ideally, we should be using real stock returns of the U.S. relative to its trading partners, since the trade balance of a country is intrinsically “relative”, i.e., it expresses a relative flow. However, due to lack of data on equity returns on the major trading partners of the U.S. over this prolonged period, restricts us to consider real stock returns of the U.S. only. In this regard, our approach is similar to that of Fratzscher and Straub (2009).
Some evidence that the trade balance reduces the real excess stock returns, and hence, the interest rate channel is at work can also be found now in Table 3, unlike what we observed for the real stock returns.
References
Aggarwal R, Schirm DC (1992) Balance of trade announcements and asset prices: in uence on equity prices, exchange rates, and interest rates. J Int Money Financ 11(1):80–95
Aggarwal R, Schirm DC (1998) Asymmetric impact of trade balance news on asset prices. J Int Financ Mark Inst Money 8(1):83–100
André C, Gupta R, Kanda PT (2012) Do house prices impact consumption and interest rate? Evidence from OECD countries using an agnostic identification procedure. Appl Econ Q 58(1):19–70
Engle R (2002) Dynamic conditional correlation: a simple class of multivariate general- ized autoregressive conditional Heteroskedasticity models. J Bus Econ Stat 20(3):339–350
Fratzscher M, Straub R (2009) Asset prices and current account fluctuations in G-7 economies. IMF Staff Pap 56(3):633–654
Fratzscher M, Straub R (2010) Asset prices, news shocks and the current account. CEPR discussion papers 8080
Fratzscher M, Juvenal L, Sarno L (2010) Asset prices, exchange rates and the current account. Eur Econ Rev 54(5):643–658
Hogan K, Melvin M, Roberts DJ (1991) Trade balance news and exchange rates: is there a policy signal? J Int Money Financ 10(1, supple):S90–S99
Holinski N, Vermeulen R (2012) The international Wealth Channel: a global error- correcting analysis. Empir Econ 43(3):985–1010
Homer S, Sylla R (2005) A history of interest rates. Wiley finance. Kitamura, Y., 2009. The current account and stock returns. Res Int Bus Financ 23(3):302–321
Kitamura Y (2009) The current account and stock returns. Res Int Bus Financ 23(3):302–321
Mercereau B (2003a) The role of stock Markets in Current Account Dynamics: a time series approach. BE J Macroecon 3(1):1–30
Mercereau B (2003b) The role of stock markets in current account dynamics: evidence from the United States. IMF working papers 03/108, International Monetary Fund
Ncube M, Ndou E (2013) Monetary policy and exchange rate shocks on south African trade balance. Working paper series 448, African development Bank
Simo-Kengne B, Miller S, Gupta R, Aye G (2015) Time-varying effects of housing and stock returns on U.S. consumption. J Real Estate Financ Econ 50(3):339–354
Welch I, Goyal A (2008) A comprehensive look at empirical performance of equity premium prediction. Rev Financ Stud 21(4):1455–1508
Acknowledgments
We would like to thank two anonymous referees for many helpful comments. However, any remaining errors are solely ours.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Antonakakis, N., Gupta, R. & Tiwari, A.K. Time-varying correlations between trade balance and stock prices in the United States over the period 1792 to 2013. J Econ Finan 42, 795–806 (2018). https://doi.org/10.1007/s12197-018-9428-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-018-9428-z